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‘Trump Effect’ Overpowers Booming Economy Ahead of Midterms

(Bloomberg) -- The booming U.S. economy is little help to Republicans trying to hold on to seats in Congress and the main reason is President Donald Trump.

Trump’s Twitter feuds and controversies have overpowered the GOP economic message, and his persistently low approval ratings may dash any Republican hopes of bucking history by avoiding the loss of House seats in the midterm elections less than three weeks away.

“Theoretically, the economy should take some of the edge off Democratic gains,” said David Wasserman, a House race analyst with the non-partisan Cook Political Report. “The problem for Republicans is President Trump, who frequently dominates the headlines with non-economic news."

Economic growth surged to 4.2 percent in the second quarter, the fastest since 2014, and is projected to come in above 3 percent for the July-September period, driven by consumer spending and business investment that’s been juiced by Republican tax cuts. The labor market is tight, with steady hiring and the unemployment rate at 3.7 percent, the lowest since December 1969.

Still, polls and fundraising, as well as forecasts by Wasserman and other independent analysts, suggest that Democrats are poised to make significant gains on Nov. 6 that may give them a majority in the House. Republicans retain an advantage in the Senate as Democrats have to defend 26 of the 35 seats on the ballot in 2018, including 10 in states where Trump won in 2016.

‘All Bets Are Off’

Election models that take into account employment, disposable income and growth “suggest that Republican losses should be modest based on the positive trend of these economic variables,” Mickey Levy, chief U.S. and Asia economist at Berenberg Capital Markets LLC in New York, said in a note to clients. “However, these elections will be influenced — maybe dominated — by the ‘Trump effect’, so all bets based on history and models are off.”

A president’s approval rating historically is an important factor in midterm elections, and Trump’s has never been above 50 percent in Gallup’s tracking poll since his inauguration. It stood at 44 percent this week, up from 38 percent a month ago but still within the narrow range where it’s been stuck throughout his term.

Presidents with Gallup job approval ratings below 50 percent have seen their party lose an average of 37 House seats in midterm elections since 1946, more than the 23 seats that Democrats need to regain the House.

The effect may be magnified with Trump, who daily puts himself into public conversation. It’s something Republican officials have acknowledged in plotting their campaign strategy.

“For the most part, this election isn’t about the condition of the economy, the number of jobs that have been created, the trade deals or negotiations with foreign countries,” according to an internal analysis commissioned by the Republican National Committee that was obtained by Bloomberg News. “Rather, the research indicates the determining factor in this election is how voters feel about President Trump.”

Trump frequently complains that the strong economy doesn’t get sufficient attention. At the same time, he’s often focused on immigration, crime and other social issues that motivate his core supporters.

Republicans argue voters are giving them credit on the economy. Senate Majority Leader Mitch McConnell said in a Bloomberg News interview that Trump’s approval rating has ticked up recently, “probably related to the feeling of these times are good.”

Republican Senator Ted Cruz said in an interview that the strong economy is what is lifting him above Democratic rival Beto O’Rourke in recent polls of the Texas Senate race.

“I think Texans are very glad for the tax cuts and the end of job killing regulations and the booming economy we are seeing as a result,” he said.

No Strong Corollary

But UBS analyst Keith Parker, the author of a study of election history, said economic data isn’t a good predictor of midterm outcomes.

"We looked at inflation, ISM manufacturing as a proxy and interest rates in the post-World War II era and there wasn’t a strong corollary between the economy and the midterm election results," he said.

Inflation has been edging up moderately, and interest rates remain historically low though the Federal Reserve has said it’ll keep raising them gradually. Parker’s study, published in August, also found no direct parallel between stock market performance before an election and the results.

Parker cited instances where the economy was doing well, such as 1978, 1994 and 2006, when the sitting president’s party lost seats.

The Institute for Supply Management’s manufacturing index stood at 60.3 percent in August 1978, and President Jimmy Carter’s Democrats still lost 15 House seats. President Harry Truman’s Democrats lost 29 House seats in 1950 despite the ISM gauge at a roaring 75.8 percent. The factory index fell to 59.8 percent last month.

Economic Picture

To the extent that Democrats have been campaigning on the economy it’s been by emphasizing slow wage growth, inequality and access to health insurance.

“The president can talk about how great the economy is for folks on Wall Street and the stock market but that’s not what people are living," said Maryland Senator Chris Van Hollen, who is in charge of the Democratic Senate election effort.

Wages have been slow to pick up and inflation is eating into worker pay. Price-adjusted average hourly earnings have edged up at an annual pace well below 0.5 percent since Trump took office, and actually fell or stagnated in several months.

Uneven Benefits

The benefits of the strong economy haven’t reached many pockets of the nation, and data show the rich-poor divide remains a challenge even in metropolitan areas. For many, the American dream of becoming a homeowner remains a distant one as house price gains are outpacing wages. Mortgage rates, meanwhile, have climbed to a seven-year high, putting home purchases further out of reach for young people and those entering the market for the first time.

Some strategists are urging Republican candidates to shift the debate back to the economy as Nov. 6 approaches, to take the focus off of Trump’s personality.

"Any candidate who is not talking about the economy is wasting their time. This is a golden nugget," said Scott Reed, a political strategist at the U.S. Chamber of Commerce. "We continue to think it is a winning issue."

"The people are going to vote their pocketbook," Reed said. "A lot of the pollsters got it wrong in 2016."